Forward Look Coal Markets 07 2012 Peabody

7/27/2019 Forward Look Coal Markets 07 2012 Peabody

1/27

na ys anInvestor Forum

Coal Markets:

Near-Term Headwindsu rong o a

Fundamentals

Jacob WilliamsVice PresidentGlobal Energy Analytics

June 27, 2012


2/27


3/27

Key Topics of Interest

China Demand as ng row a es; s ng mpor s

Metallurgical Coal ,

Future of U.S. Coal

U.S. Export Profile How Much How Fast?

Global Fundamentals Trends in Su l and Demand

3


4/27

Near-Term Coal Concerns Tug AgainstFundamental Market Strength

Market ChallengesMarket ChallengesGLOBAL Global steel growth rising

Market StrengthsMarket StrengthsGLOBAL Rising China imports

ess an pr or year

Easing thermal coal prices

UNITED STATES

rong g o a gas pr ces

Increasing EU coal burn Expanding seaborne demand Risin met coal rices

Economic growth low Gas supply robust

Coal inventories reach

UNITED STATES

Stabilizing gas prices Seasonal stock ile declines

Significant production cuts U.S. exports increasing

4


5/27

CoalCoal

MarketsMarkets


6/27

Annual World Coal Demand Expected toGrow ~1.3 Bil lion Tonnes in Five Years

10,000 Volume growthExpected Global Coal DemandExpected Global Coal Demand

(Million(Mil lion TonnesTonnes))

8,000expected to exceedlast five-year increase

840

7,600

8,900

7,900

640

6,000

More than 90% of4,7953,845 4,090

4,000

in China/India

0

2,000

by seaborne markets

3,175 ,,

2011 2012P 2016P

ROW China India

6Source: Peabody Global Analytics.


7/27

Global Seaborne Demand: 450 550 MTPYGrowth Expected by 2016; 8% CAGR

Estimated Growth inEstimated Growth inSeaborne ImportsSeaborne Imports

Pacific Demand GrowthPacific Demand Growth 85+%85+% of Total Demand Increaseof Total Demand Increase

1,400

1,600

((MillionMillion Tonnes)Tonnes)

20112011--20162016

1,500 1,600

GrowthGrowth

China200 - 250

1,000

,

Ton

nes

1,050

India100 - 150

Japan400

600Million ermaerma

ExistingExisting

-

SouthKorea20 - 40Taiwan

5 - 15

OtherPacific40 - 50

Atlantic30 - 40

0

200MetMet



8/27

Mixed Signals from ChinasShort-Term Growth

First quarter GDP

GDP, Industrial Production and Building Construction RobustGDP, Industrial Production and Building Construction Robust

China Industry & Economy Fact Sheet

of 8.1% aboveFive-Year Plan840

600

YTD '12 YTD '11 YOY

ECONOMY

GDP Growth (Q1) % 8.1% 9.7% -

May YTD

All growth frominternal consumptionand infrastructure

5,025

3,805

Industrial Production Growth % 9.6% 13.3% -

COAL

- Net Imports Mmt 107 59 81.7%

spending

Net coal imports

Generation TWh 1910 1824 4.7%

- Thermal Generation TWh 1578 1515 4.1%

Crude Steel Mmt 296 290 2.2%

Cement Mmt 794 756 5.0%

Coal generationgrowth of 4.1%

,,

Floor Space UnderConstruction Mln M2 4514 3774 19.6%

Retail Sales US$ Bln 1287 1124 14.5%

FOREIGN TRADE

Strong retail sales

and export trends 8Source: China National Bureau of Statistics and Peabody Global Analytics.

.


9/27

China Coal Demand Expected to Grow~1.0 Bil lion Tonnes by 2016

50 GW of new coal20112011 vs.vs. 20162016 Expected DemandExpected Demand

ElectricityElectricity--DrivenDriven GrowthGrowth

4,000

4,500

5,000

ns

generation comingon line in 2012570 160 70

190

3,800

4,800

2 000

2,500

3,000

3,500

onne

sinMillio

xpec ~ onew coal generation

by 2016475 Cement

925 Other

500

1,000

1,500

T

Every 1 GW of coalrequires 3.5 MTPY atfull capacity

1,825 Electricity

0 Expected 2016 total

China demand:.

9Data and estimates based on industry analysis and Peabody Global Analytics.


10/27

Majority of 240 GW Capacity GrowthThrough 2016 in North and Coasts

Current Coal Capacity ~700 GWCurrent Coal Capacity ~700 GW FiveFive--Year Growth ~240 GWYear Growth ~240 GW

Capacity Growth Unit: GW

>10 GW

Capacity Unit: GW

>30 GW

- -

1-5 GW


11/27

China Domestic ProductionMoving to North and West

China Well Situated for Significant Additional Coal ImportsChina Well Situated for Significant Additional Coal Imports

2020 Estimates2020 Estimates

et xporter >

Net Exporter 100 MTPY

>a

Net Importer


12/27

Chinas Coal Cost Increases Averaging7 9% CAGR, Encouraging Imports

Si nificant cost increasesChina Domestic Cost DriversChina Domestic Cost Drivers

driven by: Currency appreciation;

Safety

M/S

recent years

Wage pressuresCurrencyAppreciat ion

Labor Cost

Transportation

onger ranspor a onroutes

Heightened safety attention;

+ o coa m n ng sunderground

Materials/servicesFutureAverage

$100 $110/TonneExcluding VAT

escalating

12

Domestic Cost

to QHD

Source: Bloomberg, Peabody Global Analytics.


13/27

Indias New Generation Builtfor Coal Imports

Majority of 70 GW~120 GW~120 GW

Current Coal CapacityCurrent Coal Capacityo new coa p an s

built along coastalregions

Plants designed

to burn lower

Multiple new portprojects underCoal Plants Under ConstructionCoal Port

way to enableincreased imports

Capacity Unit: GW

>10 GW

5-10 GW

1-5 GW

13Source: Platts.


14/27

India Coal Use Expected to Increase~240 Million Tonnes by 2016

840

India Production & ImportsIndia Production & Imports(Tonnes in Millions)(Tonnes in Millions)

productionunable to grow210

640as wo years

Imports up 40+630

130115

595

100556

74

last two years

Coal India

482

ordered toincrease coal

2009 2010 2011 2012P 2016P


Production ImportsProduction

(3 Year Average)


15/27

Indonesia: Worlds LargestThermal Coal Exporting Nation

Fast growingsu lier to China

and India 17 GW coal-fueled

out under way

by 2020 requiring

~60 MTPY

Potential future

by domestichold-backs and

15

expor axes

Source: Peabody Global Analytics.


16/27

High CV Coal Growth to Benefit Australia;Low CV from Indonesia and PRB

1,139

GlobalGlobal Seaborne Thermal Coal DemandSeaborne Thermal Coal Demand(Million(Mill ion TonnesTonnes))

7.8%

158

43CAGR

over 60% of market Lower CV coal

648782 accounts or ~of seaborne supply

increase

203

492

Indonesia low CVsupply grows

288

130

160 ~ PRB exports will fit

well in this market

Source: Peabody Global Analytics. 16

2016PLow CV(4,700& =5,500

NAR)


17/27

Global Met Coal Use Likely to Increase25% by 2016 to Track Steel Growth

Steel rowth would2,000

Global Steel ProductionGlobal Steel Production

Global Steel Production Expected to Grow 25% by 2016Global Steel Production Expected to Grow 25% by 2016

require 250 MTPY ofmetallurgical coal by 1,600

1,800

India

China NDRC treating

cokin coal as s ecial1,200

1,400

Tonnes

China

and scarce resourceto be managed by

600

800

,

Million

200

400ROW

0

2011 2016P17Source: Peabody Global Analytics; China NDRC statements as of April 2012.


18/27

PCI Growing in Demandfrom Global Steel Producers

Pulverized Coal Injection a

PCI OverviewPCI OverviewBlast FurnaceBlast Furnace

coking coal 1.1 tonnes of low-vol PCI replaces

PCI Picture

PCI coal is used asan energy source in

onne o co e

Steelmakers use PCI to reduce

costs and free up coking capacity

a blast furnace anddoes not requirethe strength

properties of coke

If coke at ~$340/tonne and PCI at$162/tonne, then 1.1 tonne of PCIsaves $160/tonne

Majority of high quality low-volPCI supply from Australia

Consumpt ion (Mmt) 2011 2016

HCC 128 185

SHCC 47 80

Seaborne - Met By Product Type

18

-~75% of HQ Hard Coking Coal

PCI 38 50

Total Global Consumption 257 380

Source: Peabody Global Analytics.


19/27

Global Seaborne Supply: Australia andIndonesia Expected to Lead Growth

AustraliaAustralia Majority of Met SeaborneMajority of Met Seaborne Supply GrowthSupply Growth

20112011--20162016GrowthGrowth

20112011 Total ExportsTotal Exports 20162016Ex ortsEx orts

160 190

160 190Austral ia

Indonesia

Metallurgical Thermal 281

319 480 510

440 470

30 50

15 25

35 45Colombia

Russia

U.S.

88

93 120 140

105 115

110 120

10 15

0 5Canada

South Africa 67

33

75 80

35 40Total 2011 Exports:Total 2011 Exports:1,042 Mill ion Tonnes1,042 Mill ion Tonnes

(5 15)

Other

China

Mongolia

14

24

46

0 10

60 7535 50

5 10 50 55

Source: Peabody Global Analytics; McCloskey and Wood Mackenzie.Data shown in million tonnes. Excludes land-based exports, except Mongolia.

450 5500 50 100 150 200 250 300 350

19

1,470 1,615


20/27

Alternative Coal Supply Sources Limited

Colombia: Expansions under way; Some expansionsdelayed due to environmental permitting concerns

South Africa: Growth plans struggle to materialize;Domestic markets need additional coal first

uss a: xpans ons con nue u ong ra s ancefrom ports limit growth

,

Mongolia: Growth challenged on several fronts

river/port development delayed

20


21/27

. .. .MarketsMarkets


22/27

U.S. Coal: PRB and Ill inois Basin toGain from Rising Gas Prices, Exports

NEAR TERM

Key ThemesKey Themes

. .

Coal use to begin rebound in 2013 as gas pricesexpected to rise

Inventories lowest in West and Midwest sourced coalLONG TERM PRB Illinois Basin to ain as CAPP declines Plant retirement effects likely less than many project U.S. exports to continue to increase from Gulf and West

22


23/27

Rising Gas Prices to Benefit PRB First

Forecast coal

Future Market Prices Favorable for PRB and ILBFuture Market Prices Favorable for PRB and ILB

U.S. Natural Gas Prices ($/U.S. Natural Gas Prices ($/mmBtummBtu))

Futures

generation to be down100 120 million tons

PRB to benefit as gas

prices settle above

ILB Competitive

$2

$2.50 $2.75/mmBtu

ILB more competitive at

ompe ve

$1

. .

Eastern coal requiresgas prices of $4.50

2011 2012 2013 2014 2015 2016 2017 or higher

Source: Energy Information Administration , Genscape, EVA, PIRA, Bloomberg, Peabody Global Analytics . 23


24/27

U.S. Coal Plant Retirements LargelyOffset by New Plants, Capacity Utilization

GW of Coal Capacity Retired & Mill ion TonsGW of Coal Capacity Retired & Mill ion TonsConsumed by Plants Retiring 2011Consumed by Plants Retiring 2011 20162016

Cumulative Generation Changes

Million Tons

New GenerationSPRB / ILB 27

Other 115 GW2 GW5 MT

Retirements

SPRB / ILB -22

Other -35

Total Retirements -58

3 MT

3 MT

5 GW9 MT

10 GW11 MT

Capacity Utilization & Switching

SPRB / ILB 44

Other -43

Total Cap./Switch 1

3 GW8 MT

13 MT

1 GWTotal

SPRB / ILB 48

Other -67

Total Change -19

1 MT

Source: Peabody Global Analytics and Ventyx . 24

Majority of Retirements in Eastern U.S.Majority of Retirements in Eastern U.S.


25/27

Significant Demand Shift TowardsPRB and Ill inois Basin

PRB advantage

Low end of cost curve

Expected U.S. ProductionExpected U.S. ProductionChange 2011Change 2011 20162016

Primary source for new plants

Benefits from basin switching

Asian export potentialILB

Illinois Basin advantage

Major source for new plants

SPRB

ene s rom new scru ersand basin switching

Transport advantage to Gulf

Other

CO

CAPP Challenged to compete with

natural gas generation and CAPP

-80 -60 -40 -20 0 20 40

25Source: Peabody Global Analytics and industry reports.


26/27

Near-Term Challenges But SolidGlobal Coal Fundamentals

Near-term headwinds from U.S. gas prices,European debt crisis and Asia worries

Positive near-term signs with rising global met coalprices, strong coal generation in China, India andurope an g er na mpor s

Long-term fundamentals sound with high met and

26


27/27

na ys an

Investor Forum

Coal Markets:

Near-Term Headwindsu rong o aFundamentals

Jacob WilliamsVice PresidentGlobal Energy Analytics

June 27, 2012

Documents

Forward Look Coal Markets 07 2012 Peabody